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Social Security (Reduced Rates of Class 1 Contributions, Rebates and Minimum Contributions) Order 2006

My Lords, I thank the Minister for introducing the order. I would like to say that we welcome it, but I cannot. This mean-spirited order is unhappily all of a piece with the Government’s cavalier approach to pensions in the private sector. The Government have done nothing good for private sector pension provision in the past nine years. They have virtually demolished private sector defined benefit provision, starting with the ACT raid. As pension schemes started to fail, the Government responded at speed to create a new category of preferential debt on company balance sheets via the Pension Protection Fund, which would be better named the government protection fund. The combined weight of funding the PPF and the powers of the new regulator is today threatening the economic viability of some businesses. The pensions tail is in too many cases wagging the wealth-creating dog. At the same time, the Government have been dilatory and mean about the amount of money available to and distributed by the Financial Assistance Scheme. The Government have also presided over a collapse in private savings, and this week’s Budget has done nothing to reverse that. The Chancellor’s bid to make a majority of pensioners dependent on means-tested benefits has produced yet more disincentives to save, and the savings credit has muddied the waters still further. But the Government have gone to great lengths to protect public sector defined benefit provision and, in the case of judicial pensions, they have gone to extraordinary lengths to protect the enhanced benefits of a privileged few. It is necessary to paint that background before we move to the narrower territory of today’s order. I have always regarded contracting out as one of the more arcane areas of pension provision, and so it is in the detail. But the big picture is that, through contracting out, the Government achieve a transfer of liabilities and risk from public funds to the private sector. In return for that transfer of risk, the Government pay the private sector via a system of national insurance rebates, so it is important that the price for that transfer is right. The Government say that the price for the next five years is to be 5.3 per cent with the reduced caps that the Minister explained, but no one else seems to agree with them. The Government Actuary has said that the rebate should be 5.8 per cent. The Government’s decision to ignore the Government Actuary has been described by the actuaries Mercer as ““the stealthiest of taxes””—and we have seen quite a few stealth taxes over the past few years, so that is quite an accolade. Actuaries Watson Wyatt have calculated that the new rebate will put another £1.5 billion of pressure on schemes, and another firm, Hymans Robertson, has calculated that £2 billion will be needed. The National Association of Pension Funds has noted that recent changes such as the introduction of the Pension Protection Fund have increased the costs of private pension provision and transferred additional risk from the Government. In that light, the NAPF believes that a fairer rebate level would be around 8 per cent rather than 5.3 per cent. The Association of British Insurers has pointed to the difficulty, which will be exacerbated by the new rebate levels, in advising employees whether to contract out or to remain contracted out. The ABI has particular concerns about the unattractive nature of contracting out for many more people than at present. It believes that contracting out should be a ““win-win”” for the Government, employers and employees, but it thinks that the new rebate level has destroyed that equation in many cases, especially for older people—““old”” in this case being past the age of 43. For many over that age, with these new rebates, contracting out will be the wrong answer. The ABI has also challenged the use by the Government Actuary’s Department of an equity risk premium in the calculations by the Government Actuary, because the ABI does not believe that it is correct to assume that an employee who contracts out should be more risk-tolerant than the average employee. It believes that actuarial neutrality implies the use of a risk-free discount rate. Indeed, the ABI goes further and suggests that the Government should build in a small premium for contracting out to simplify decision making for individuals. The Government have justified this order, which has the imprint of the Treasury all over it, on the basis of ““cost neutrality””, whatever that means. It certainly does not mean neutrality for occupational pension schemes. That translates as no short-term cost to the Treasury. This decision about the rebate should not be about protecting the Treasury; it should be about a fair recompense for the transfer of liability and risk. The fig leaf for this decision is the Turner review, which is doubtless a convenient way to avoid many awkward questions for a while. But that cannot be more than an excuse, as any changes post-Turner will take a long time to implement and are unlikely to have any impact for the duration of this quinquennial determination of the rebate rates. It is difficult to find questions to put to the Minister beyond the overarching ““why?”” Why are the Government doing this to the contracted-out rebate? Cost neutrality and fiscal circumstances are weasel words which have nothing to do with the honest operation of the rebate. If we do not get an honest answer today to the ““why”” question, perhaps the Minister will give an honest answer to a ““when”” question. We have to wait for the Government’s response to the Turner report, which the Minister mentioned. He said the report would be available ““this spring””—I think that I have quoted him correctly—but I understand that the phrase used in another place was ““late spring””. Will the Minister either say precisely when the report will be available or define when spring starts and ends?